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So You Want to Invest in Bitcoin: Here s What You Should Know – The Motley Idiot

So You Want to Invest in Bitcoin: Here's What You Should Know

This article was updated on August 7, 2017, and originally published on March 25, 2017.

Earlier this year the U.S. Securities and Exchange Commission rejected a bid by Tyler and Cameron Winklevoss, the twins infamous for claiming that Mark Zuckerberg stole the idea of Facebook from them while they were undergrads at Harvard, to launch a bitcoin-based ETF (exchange-traded fund). The decision from the SEC came almost four years after they filed for regulatory approval. In the instant aftermath of this news, the price of bitcoins, which had almost tripled over the last year, significantly dropped to less than $1,000.

Albeit other bitcoin-based ETFs are awaiting approval, and this decision did not directly affect their status, the wording of the SEC ruling did not originally show up to bode well for the prospects of bitcoin-based exchanges anytime soon.

The SEC determined that the proposed bitcoin ETF failed to meet these standards because the markets for bitcoins were unregulated. Of course, the primary problem for future bitcoin-based ETFs is that by their very nature, bitcoins will always trade on an unregulated market. It was surprising then, when just a duo of months later on April 24th, the SEC agreed to review its decision on the creation of a bitcoin ETF. In the four months since the SEC’s decision to review its earlier rejection, bitcoin prices have rallied an amazing 163%.

To be clear, there is no physical manifestation of a bitcoin that looks like this; it is a digital currency. Picture source: Pixabay.

What is bitcoin?

Bitcoin is a digital payment system with no intermediaries or banks; it was invented by a person or group using the alias Satoshi Nakamoto, and released as open-source software in 2009. The U.S. Treasury has categorized it as a decentralized virtual currency tho’ some believe it is best described as a “cryptocurrency.” OxfordDictionaries.com helpfully defines cryptocurrency as “a digital currency in which encryption mechanisms are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”

Bitcoin uses blockchain technology to record its transactions. Essentially, the blockchain is a publicly distributed ledger for certain financial transactions. It is presently mostly used for bitcoin, but many believe it could be used in a broad multitude of financial applications in the future.

As used in bitcoin, blockchain is a public ledger of all bitcoin transactions that have ever been made. When a transaction is finished, it is recorded on a fresh “block.” When the block is total of such transactions, it is added to the end of the “chain” in sequential order, and a fresh block is created. Total blocks are a part of the blockchain’s permanent database. Each knot — a computer connected to the bitcoin network for the purpose of verifying transactions — automatically gets a downloaded copy of the blockchain upon joining the network. The blockchain records information like the time and amount of each transaction, but it does not store any private information on the parties involved.

Even industry experts who believe that bitcoin is not a sustainable monetary unit think blockchain technology could radically switch the way financial transactions are facilitated in the future. The benefits of this system are that it is translucent, secure, and streamlined, so that there are less parties involved in facilitating each and every transaction.

Even as the existing payments system in developed countries becomes ever more convenient and secure, the space is still littered with middle parties taking a petite amount from each transaction. These players include payment processors, payment networks, issuing banks, and acquiring banks. The wish of bitcoin and other monetary systems based on blockchain technology is for payers to be free of these inherent costs of exchanging currency for goods.

For a much more detailed explanation of what bitcoin is, where bitcoins come from, and how they work, please check out fellow Loser Matthew Frankel’s article on this subject from earlier this year, “What Is Bitcoin?”

The potential problems with investing in bitcoin

There are a few primary concerns surrounding bitcoin that potential investors should be aware of. Very first, it is not backed or regulated by the good faith of a government or other entity. This stands in stark contrast to the dollar, yuan, pound, and other forms of currency used around the globe. So, many people view bitcoin as something akin to Monopoly money, because it is neither a fiat currency nor is it based on something of tangible value like gold. In other words, a bitcoin is worth exactly what people perceive its worth to be. While, in a sense, this is true of any currency, the value of a bitcoin is much more fickle than other forms of currency because of its unregulated nature.

2nd, bitcoins are not traded on Wall Street. They cannot be bought or sold through a brokerage. Instead, one must set up a bitcoin “wallet,” which can most likely best be thought of as a bank account exclusively for bitcoins. Once this account is set up, its holder can link to a traditional banking account and use those funds in local currency to buy and sell bitcoins.

If this process sounds a bit cumbersome, it is. This means bitcoin is much less liquid than traditional equities, creating more volatility and wild swings. For example, in the past month alone, the value of one bitcoin fell from prices over $Two,500 to under $Two,000 before regaining all-time highs over $Trio,400. Those are exceptionally volatile swings within one month — something virtually unheard of with any other type of currency!

Ultimately, the unique way of buying and selling bitcoins not only contributes to its illiquid nature, but has also contributed to higher rates of fraud and theft through uninsured bitcoin exchanges. While these problems were far more prevalent in years past, it should still be mentioned that none of the bitcoin exchanges have yet established a long business track record.

This brings us back to the SEC’s review of the Winklevoss twins’ proposal to launch a bitcoin-based ETF. Such an ETF would have solved at least some of these problems. It would have made trading bitcoin much more liquid, and assuaged many investors’ fears of potential theft. Viewed in this light, bitcoin’s massive sell-off on the initial news of the rejection and subsequent rise on the appeal of the decision makes a lot of sense.

The Foolish conclusion

Where do the price and value of bitcoin go from here? Unluckily, my crystal ball is violated. I personally believe that within a few years, bitcoin could fall anywhere — from being known as a worthless experiment, to being the greatest disruptive force the financial industry has ever seen.

If I knew investors who wished to purchase a petite, speculative position in bitcoin, I wouldn’t attempt to talk them out of it. However — and I cannot stress this enough — nothing should be invested in bitcoin currency that an investor isn’t comfy losing.

Investors intrigued by the concepts of bitcoin and blockchain technology, but unwilling to take the plunge on such a speculative investment, may want to consider investing in one of the many financial and technology companies actively working to find other applications for blockchain.

For example, the Hyperledger project is one such global collaboration; its participants include Cisco Systems, IBM, Intel, JPMorgan Pursue, and Wells Fargo. The project is exploring uses for an open-source blockchain platform in supply chains, legal agreements, and commercial business transactions.

For potential investors, the large takeaway should very likely be that blockchain technology will most likely exist in one form or another for years to come. The fate of bitcoin, however, is far more uncertain.

Matthew Cochrane possesses shares of Cisco Systems. The Motley Loser recommends Cisco Systems and Intel. The Motley Loser has a disclosure policy.

So You Want to Invest in Bitcoin: Here s What You Should Know – The Motley Loser

So You Want to Invest in Bitcoin: Here's What You Should Know

This article was updated on August 7, 2017, and originally published on March 25, 2017.

Earlier this year the U.S. Securities and Exchange Commission rejected a bid by Tyler and Cameron Winklevoss, the twins infamous for claiming that Mark Zuckerberg stole the idea of Facebook from them while they were undergrads at Harvard, to launch a bitcoin-based ETF (exchange-traded fund). The decision from the SEC came almost four years after they filed for regulatory approval. In the instant aftermath of this news, the price of bitcoins, which had almost tripled over the last year, significantly dropped to less than $1,000.

Albeit other bitcoin-based ETFs are awaiting approval, and this decision did not directly affect their status, the wording of the SEC ruling did not originally show up to bode well for the prospects of bitcoin-based exchanges anytime soon.

The SEC determined that the proposed bitcoin ETF failed to meet these standards because the markets for bitcoins were unregulated. Of course, the primary problem for future bitcoin-based ETFs is that by their very nature, bitcoins will always trade on an unregulated market. It was surprising then, when just a duo of months later on April 24th, the SEC agreed to review its decision on the creation of a bitcoin ETF. In the four months since the SEC’s decision to review its earlier rejection, bitcoin prices have rallied an amazing 163%.

To be clear, there is no physical manifestation of a bitcoin that looks like this; it is a digital currency. Picture source: Pixabay.

What is bitcoin?

Bitcoin is a digital payment system with no intermediaries or banks; it was invented by a person or group using the alias Satoshi Nakamoto, and released as open-source software in 2009. The U.S. Treasury has categorized it as a decentralized virtual currency tho’ some believe it is best described as a “cryptocurrency.” OxfordDictionaries.com helpfully defines cryptocurrency as “a digital currency in which encryption technics are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”

Bitcoin uses blockchain technology to record its transactions. Essentially, the blockchain is a publicly distributed ledger for certain financial transactions. It is presently mostly used for bitcoin, but many believe it could be used in a broad multiplicity of financial applications in the future.

As used in bitcoin, blockchain is a public ledger of all bitcoin transactions that have ever been made. When a transaction is ended, it is recorded on a fresh “block.” When the block is total of such transactions, it is added to the end of the “chain” in sequential order, and a fresh block is created. Total blocks are a part of the blockchain’s permanent database. Each knot — a computer connected to the bitcoin network for the purpose of verifying transactions — automatically gets a downloaded copy of the blockchain upon joining the network. The blockchain records information like the time and amount of each transaction, but it does not store any individual information on the parties involved.

Even industry experts who believe that bitcoin is not a sustainable monetary unit think blockchain technology could radically switch the way financial transactions are facilitated in the future. The benefits of this system are that it is see-through, secure, and streamlined, so that there are less parties involved in facilitating each and every transaction.

Even as the existing payments system in developed countries becomes ever more convenient and secure, the space is still littered with middle parties taking a puny amount from each transaction. These players include payment processors, payment networks, issuing banks, and acquiring banks. The wish of bitcoin and other monetary systems based on blockchain technology is for payers to be free of these inherent costs of exchanging currency for goods.

For a much more detailed explanation of what bitcoin is, where bitcoins come from, and how they work, please check out fellow Loser Matthew Frankel’s article on this subject from earlier this year, “What Is Bitcoin?”

The potential problems with investing in bitcoin

There are a few primary concerns surrounding bitcoin that potential investors should be aware of. Very first, it is not backed or regulated by the good faith of a government or other entity. This stands in stark contrast to the dollar, yuan, pound, and other forms of currency used around the globe. So, many people view bitcoin as something akin to Monopoly money, because it is neither a fiat currency nor is it based on something of tangible value like gold. In other words, a bitcoin is worth exactly what people perceive its worth to be. While, in a sense, this is true of any currency, the value of a bitcoin is much more fickle than other forms of currency because of its unregulated nature.

2nd, bitcoins are not traded on Wall Street. They cannot be bought or sold through a brokerage. Instead, one must set up a bitcoin “wallet,” which can very likely best be thought of as a bank account exclusively for bitcoins. Once this account is set up, its holder can link to a traditional banking account and use those funds in local currency to buy and sell bitcoins.

If this process sounds a bit cumbersome, it is. This means bitcoin is much less liquid than traditional equities, creating more volatility and wild swings. For example, in the past month alone, the value of one bitcoin fell from prices over $Two,500 to under $Two,000 before regaining all-time highs over $Three,400. Those are amazingly volatile swings within one month — something virtually unheard of with any other type of currency!

Eventually, the unique way of buying and selling bitcoins not only contributes to its illiquid nature, but has also contributed to higher rates of fraud and theft through uninsured bitcoin exchanges. While these problems were far more prevalent in years past, it should still be mentioned that none of the bitcoin exchanges have yet established a long business track record.

This brings us back to the SEC’s review of the Winklevoss twins’ proposal to launch a bitcoin-based ETF. Such an ETF would have solved at least some of these problems. It would have made trading bitcoin much more liquid, and assuaged many investors’ fears of potential theft. Viewed in this light, bitcoin’s massive sell-off on the initial news of the rejection and subsequent rise on the appeal of the decision makes a lot of sense.

The Foolish conclusion

Where do the price and value of bitcoin go from here? Unluckily, my crystal ball is violated. I personally believe that within a few years, bitcoin could fall anywhere — from being known as a worthless experiment, to being the greatest disruptive force the financial industry has ever seen.

If I knew investors who desired to purchase a puny, speculative position in bitcoin, I wouldn’t attempt to talk them out of it. However — and I cannot stress this enough — nothing should be invested in bitcoin currency that an investor isn’t comfy losing.

Investors intrigued by the concepts of bitcoin and blockchain technology, but unwilling to take the plunge on such a speculative investment, may want to consider investing in one of the many financial and technology companies actively working to find other applications for blockchain.

For example, the Hyperledger project is one such global collaboration; its participants include Cisco Systems, IBM, Intel, JPMorgan Pursue, and Wells Fargo. The project is exploring uses for an open-source blockchain platform in supply chains, legal agreements, and commercial business transactions.

For potential investors, the large takeaway should most likely be that blockchain technology will most likely exist in one form or another for years to come. The fate of bitcoin, however, is far more uncertain.

Matthew Cochrane wields shares of Cisco Systems. The Motley Idiot recommends Cisco Systems and Intel. The Motley Idiot has a disclosure policy.

So You Want to Invest in Bitcoin: Here s What You Should Know – The Motley Idiot

So You Want to Invest in Bitcoin: Here's What You Should Know

This article was updated on August 7, 2017, and originally published on March 25, 2017.

Earlier this year the U.S. Securities and Exchange Commission rejected a bid by Tyler and Cameron Winklevoss, the twins infamous for claiming that Mark Zuckerberg stole the idea of Facebook from them while they were undergrads at Harvard, to launch a bitcoin-based ETF (exchange-traded fund). The decision from the SEC came almost four years after they filed for regulatory approval. In the instant aftermath of this news, the price of bitcoins, which had almost tripled over the last year, significantly dropped to less than $1,000.

Albeit other bitcoin-based ETFs are awaiting approval, and this decision did not directly affect their status, the wording of the SEC ruling did not originally show up to bode well for the prospects of bitcoin-based exchanges anytime soon.

The SEC determined that the proposed bitcoin ETF failed to meet these standards because the markets for bitcoins were unregulated. Of course, the primary problem for future bitcoin-based ETFs is that by their very nature, bitcoins will always trade on an unregulated market. It was surprising then, when just a duo of months later on April 24th, the SEC agreed to review its decision on the creation of a bitcoin ETF. In the four months since the SEC’s decision to review its earlier rejection, bitcoin prices have rallied an amazing 163%.

To be clear, there is no physical manifestation of a bitcoin that looks like this; it is a digital currency. Picture source: Pixabay.

What is bitcoin?

Bitcoin is a digital payment system with no intermediaries or banks; it was invented by a person or group using the alias Satoshi Nakamoto, and released as open-source software in 2009. The U.S. Treasury has categorized it as a decentralized virtual currency tho’ some believe it is best described as a “cryptocurrency.” OxfordDictionaries.com helpfully defines cryptocurrency as “a digital currency in which encryption technologies are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”

Bitcoin uses blockchain technology to record its transactions. Essentially, the blockchain is a publicly distributed ledger for certain financial transactions. It is presently mostly used for bitcoin, but many believe it could be used in a broad multitude of financial applications in the future.

As used in bitcoin, blockchain is a public ledger of all bitcoin transactions that have ever been made. When a transaction is finished, it is recorded on a fresh “block.” When the block is total of such transactions, it is added to the end of the “chain” in sequential order, and a fresh block is created. Total blocks are a part of the blockchain’s permanent database. Each knot — a computer connected to the bitcoin network for the purpose of verifying transactions — automatically gets a downloaded copy of the blockchain upon joining the network. The blockchain records information like the time and amount of each transaction, but it does not store any private information on the parties involved.

Even industry experts who believe that bitcoin is not a sustainable monetary unit think blockchain technology could radically switch the way financial transactions are facilitated in the future. The benefits of this system are that it is see-through, secure, and streamlined, so that there are less parties involved in facilitating each and every transaction.

Even as the existing payments system in developed countries becomes ever more convenient and secure, the space is still littered with middle parties taking a puny amount from each transaction. These players include payment processors, payment networks, issuing banks, and acquiring banks. The wish of bitcoin and other monetary systems based on blockchain technology is for payers to be free of these inherent costs of exchanging currency for goods.

For a much more detailed explanation of what bitcoin is, where bitcoins come from, and how they work, please check out fellow Loser Matthew Frankel’s article on this subject from earlier this year, “What Is Bitcoin?”

The potential problems with investing in bitcoin

There are a few primary concerns surrounding bitcoin that potential investors should be aware of. Very first, it is not backed or regulated by the good faith of a government or other entity. This stands in stark contrast to the dollar, yuan, pound, and other forms of currency used around the globe. So, many people view bitcoin as something akin to Monopoly money, because it is neither a fiat currency nor is it based on something of tangible value like gold. In other words, a bitcoin is worth exactly what people perceive its worth to be. While, in a sense, this is true of any currency, the value of a bitcoin is much more fickle than other forms of currency because of its unregulated nature.

2nd, bitcoins are not traded on Wall Street. They cannot be bought or sold through a brokerage. Instead, one must set up a bitcoin “wallet,” which can most likely best be thought of as a bank account exclusively for bitcoins. Once this account is set up, its holder can link to a traditional banking account and use those funds in local currency to buy and sell bitcoins.

If this process sounds a bit cumbersome, it is. This means bitcoin is much less liquid than traditional equities, creating more volatility and wild swings. For example, in the past month alone, the value of one bitcoin fell from prices over $Two,500 to under $Two,000 before regaining all-time highs over $Trio,400. Those are exceptionally volatile swings within one month — something virtually unheard of with any other type of currency!

Ultimately, the unique way of buying and selling bitcoins not only contributes to its illiquid nature, but has also contributed to higher rates of fraud and theft through uninsured bitcoin exchanges. While these problems were far more prevalent in years past, it should still be mentioned that none of the bitcoin exchanges have yet established a long business track record.

This brings us back to the SEC’s review of the Winklevoss twins’ proposal to launch a bitcoin-based ETF. Such an ETF would have solved at least some of these problems. It would have made trading bitcoin much more liquid, and assuaged many investors’ fears of potential theft. Viewed in this light, bitcoin’s massive sell-off on the initial news of the rejection and subsequent rise on the appeal of the decision makes a lot of sense.

The Foolish conclusion

Where do the price and value of bitcoin go from here? Unluckily, my crystal ball is cracked. I personally believe that within a few years, bitcoin could fall anywhere — from being known as a worthless experiment, to being the greatest disruptive force the financial industry has ever seen.

If I knew investors who wished to purchase a petite, speculative position in bitcoin, I wouldn’t attempt to talk them out of it. However — and I cannot stress this enough — nothing should be invested in bitcoin currency that an investor isn’t convenient losing.

Investors intrigued by the concepts of bitcoin and blockchain technology, but unwilling to take the plunge on such a speculative investment, may want to consider investing in one of the many financial and technology companies actively working to find other applications for blockchain.

For example, the Hyperledger project is one such global collaboration; its participants include Cisco Systems, IBM, Intel, JPMorgan Pursue, and Wells Fargo. The project is exploring uses for an open-source blockchain platform in supply chains, legal agreements, and commercial business transactions.

For potential investors, the large takeaway should very likely be that blockchain technology will very likely exist in one form or another for years to come. The fate of bitcoin, however, is far more uncertain.

Matthew Cochrane possesses shares of Cisco Systems. The Motley Loser recommends Cisco Systems and Intel. The Motley Idiot has a disclosure policy.

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